“You’ll kill companies first, drive prices down, manufacturers will be happy for a little while, and then supply will start to dry up, and then there will be a mass panic because manufacturers will not be able to buy gas.
“They’ll have to import gas, and when you import gas, you will be paying international import prices, which are a lot higher than the prices you are paying in Australia today.
“So it will be a very short-lived sugar hit in my view.”
The government is due to release further information within days on the design of the proposed gas reservation system, which has so far been announced only in headline terms.
The situation has left gas producers in a state of extreme uncertainty about the rules, which will primarily affect Queensland’s three LNG export ventures but also a host of smaller, domestic-focused gas producers, which would face lower sales prices that may discourage new investment.
Shell’s Wake, who also chairs Australian Energy Producers, said creating a structural oversupply in the east coast gas market, as proposed by the government, would “absolutely cruel forward investment” in gas supply and crowd out domestic producers.
She said it would also remove any incentive for LNG exporters to invest in additional supply beyond their sales contracts and reduce the trust of Australia’s trading partners in Asia in the reliability of LNG imports.
Wake said the obligation to sell domestic gas, rather than just offer it to local customers, would represent a fundamental “rebalancing” between buyers and sellers.
“The impact of that – it sounds like an easy thing in a press release – but the consequence of that is that it would drive the price to the short-run marginal cost of the lowest cost producer, and that will absolutely destroy investment signals for domestic producers and for exporters alike,” she said.
Woodside’s Westcott contrasted the Albanese government’s proposed reservation system with Western Australia’s, which retains flexibility over when reserved gas must be supplied to local customers.
Western Australia’s 15 per cent reservation system applies over the life of an LNG project, rather than annually, as proposed by the new federal system.
Westcott said the flexibility of the West Australian system allowed producers such as Woodside to supply gas when it is most needed.
“Flooding [the market] in the 2020s is going to be sacrificial to the 2030s as the gas can only be used once,” she said.
“Our view is that forcing gas into markets when they don’t need it is counterproductive for everybody.”
Western Australia is to receive a carve-out from the national reservation system, with the details yet to be finalised.
Brett Woods, the chief executive of Beach Energy, which only produces gas for domestic customers on the east coast, warned that the reservation system could mean that Australia’s energy system cannot meet increased demand for energy arising from data centres and the use of artificial intelligence.
“There’s a lot of work that needs to be done in understanding the actual implications of what is being proposed,” Woods said.
“If the model is that we are going to be taxed, through 20 per cent reservation or whatever … then our ability to execute over the next few years is massively diminished and we may not have the back-up to support AI development.
“So there is this compounding problem that poorly thought-through policy can force.”
Texas billionaire Bryan Sheffield said the reservation policy was a negative for the Beetaloo Basin gas project in the remote Northern Territory.
“When I hear things like that, it makes me nervous,” Sheffield said.
He is the managing partner of Formentera Partners, which has US$2.8 billion ($3.9 billion) of investments in the oil and gas sector, including in Beetaloo explorer Daly Waters Energy.
He cautioned that the policy would make it harder for Daly Waters’ new Beetaloo partner, Inpex of Japan, to get approval for its investment from Tokyo.
